Windstorm insurance has Texas in tough spot
Approving commissioner’s statute change, or something similar, would be best solution
By Seth Chandler
Houston Chronicle, March 14, 2014, B7
The fate of hundreds of thousands of policyholders of the Texas Windstorm Insurance
Association, the largest insurer of wind risk along the Texas coast, is about to rest this summer
on whether a court allows a state regulator to basically rewrite legislation that makes little sense.
Texas Insurance Commissioner Julia Rathgeber must convince the court that she has the
authority effectively to change a statute enacted by the Texas Legislature in 2011. If she cannot
do so — and it will be an uphill struggle — the windstorm insurance association is likely to have
insufficient funds to pay claims this coming summer in the event of a serious hurricane. The
problem is that Rathgeber’s solution reaches ever more deeply into the pocket of individuals who
live along the coast but who do not have insurance from TWIA or, indeed, may not have
homeowner’s insurance at all.
The problem is created by legislative action in 2011 that made a bad problem worse. In 2009,
Texas shifted to a system that permitted the windstorm insurance association to have very little
cash and secure funds on hand to pay claims but gave it the purported ability to borrow in layers
following a big storm. The problem, however, was that the first layer of borrowing was supposed
to be paid back by high premium surcharges on TWIA policyholders. But lenders warned that
they might not lend on that basis because many of these policyholders might not be able to pay
high surcharges following a storm. They might not even have property worth insuring.
By law, the windstorm insurance association couldn’t borrow the higher layers of funds unless
the lower layers succeeded. That left TWIA with little borrowing capacity at all.
In 2011, the Legislature recognized the problem and came up with Plan B. If the first layer didn’t
sell, the windstorm insurance association could skip to the second layer. But the Legislature
didn’t want TWIA policyholders to escape altogether. So, it decided that, now, TWIA
policyholders would pay for part of this “second” layer of bonds. But, as Rathgeber has
recognized, this probably doesn’t fix the problem. Lenders may still not lend much money if the
source of payback is too-large surcharges on devastated policyholders. The windstorm insurance
association might still find itself without much money to pay claims.
Rathgeber is now circulating draft regulations with a fairly sensible fix. Plan B would now have
the windstorm insurance association borrow based not even in part on significant surcharges on
TWIA policyholders, but based on lower surcharges on a broader range of coastal property
policies along with assessments on Texas property insurers. Lenders would probably accept that.
Higher layers of borrowing would then be accessible as well.
This wouldn’t make the windstorm insurance association financially healthy, but it would at least
give the troubled organization a fighting chance to pay claims in the event of a moderate
hurricane.
But there’s a hitch. Rathgeber has effectively written the 2011 legislative action out of existence.
Regulators aren’t supposed to rewrite legislation; they are supposed to implement it. She’s
changed who has to pay for losses suffered by the windstorm insurance association. That point
won’t be lost on coastal Texans, particularly those who don’t have TWIA policies. Coastal
legislators are already spearheading protests against higher rates and warning their constituents
of the potential for greater surcharges. Moreover, even if a court might ultimately say that the
Texas statute is so bad that the commissioner was within her rights in fixing it, what lender
would be willing to give the windstorm insurance association $1 billion after a hurricane when
the source of repayment was subject to a substantial court challenge?
All of this puts Texas in a tough place. The windstorm insurance association has only $400
million in cash at best. An average minor hurricane hitting Galveston could generate $600,000 in
insured losses; an average major hurricane in Corpus Christi could cost the insurance association
$4 billion. The best fix would come if groups on the coast could come together and agree to
legislation that either ratified the commissioner’s fix or came up with something similar. A quick
special session could then give the windstorm insurance association a chance of limping through
this hurricane season until more fundamental windstorm reform could take place.
Chandler is a Foundation Professor of Law at the University of Houston Law Center, where he
specializes in insurance law. He is also the author of the blog Texas Windstorm: The law and
finance of insuring catastrophic risk in Texas.